The U. S. Court of Appeals for the Federal Circuit, applying Ninth Circuit law to the issue of arbitrability of a defense, vacated a district court's denial of stay of litigation pending arbitration finding it had not performed the correct inquiry for arbitrability. Qualcomm, Inc. v. Nokia Corp., Case No. 2006-1317 (Fed. Cir., Oct. 20, 2006) (Prost, J.).
Qualcomm and Nokia are parties to a license agreement that contains an arbitration clause covering "[a]ny dispute, claim or controversy arising out of or relating to this Agreement." Qualcomm filed suit against Nokia and, six weeks later, Nokia initiated an arbitration proceeding against Qualcomm. Qualcomm later amended its complaint to exclude any product licensed under the license agreement. Two issues asserted by Nokia in the arbitration proceeding, an estoppel defense and a license defense, were not raised in Qualcomm's district court complaint, but were asserted as affirmative defenses by Nokia in the district court action. Nokia moved under Section 3 of the Federal Arbitration Act (FAA) to stay the litigation in favor of arbitration of Nokia's defenses pursuant to the license agreement. The district court denied the motion, holding that the litigation did not concern products covered by the license agreement. Nokia appealed.
The issue was not whether the defenses that Nokia sought to refer to arbitration were arbitrable; but rather whether the arbitrability of those defenses was itself arbitrable. After determining that Ninth Circuit law governs this case, the Federal Circuit set forth the "satisfied" standard of Section 3 of the FAA. The district court must inquire as to whether the parties "clearly and unmistakably" intended to delegate arbitrability decisions to an arbitrator and, if so, then determine whether the assertion of arbitrability is "wholly groundless." If the parties did not "clearly and unmistakably" intend to delegate such decisions to an arbitrator or if the assertion of arbitrability is wholly groundless, the district court may deny a motion to stay a litigation pending arbitration.
Regarding the first prong of the inquiry, the Court recognized that under federal law and under California law (under which the agreement was to be construed), the general rule is that the district court, not an arbitrator, determines the question of arbitrability. However, the Court recognized that the 1995 Supreme Court decision in First Options of Chicago, Inc. v. Kaplan allows for an arbitrator to "arbitrate arbitrability" if there is "clear and unmistakable evidence" that the parties so agreed.
Regarding the second ("wholly groundless") prong of the inquiry, the Court looked to California case law. Without the "wholly groundless" inquiry, the Court warned that a party could assert "any claim at all, no matter how divorced from the parties' agreement, to force an arbitration." In determining whether a claim is "wholly groundless," the Court stated that the district court should "look to the scope of the arbitration clause and the precise issues" sought to be arbitrated, but the district court "need not, and should not, determine whether [such] issues are in fact arbitrable."
In this case, finding that the district court did not apply the correct analysis, the Federal Circuit vacated the denial of the stay of litigation. Applying the correct analysis standard to the case at hand, the Federal Circuit held that the parties clearly and unmistakably intended to delegate to an arbitrator the issue of determining arbitrability. The Court then remanded to the district court the issue of whether Nokia's assertion that its defenses "aris[e] out of or relat[e]" to the license agreement is "wholly groundless."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
